Indian Railway Finance Corporation (IRFC) and the National Bank of Agriculture & Rural Development

RELATED ARTICLES IRFC to raise Rs 6,300 cr from tax-free bonds

(Nabard) have been permitted to issue bonds worth about Rs 15,000 crore.

IRFC will raise Rs 5,000 crore and its bonds will be tax-free, secured, redeemable and non-convertible. The debt paper will offer an interest rate of between 6.5 and 7.25 per cent, according to a finance ministry release. The interest income will be tax- free.

According to IRFC, it will raise the money in two tranches, the first of which may hit the market in about 10 days. Other matters like the exact coupon rate and the maturity are yet to be decided, its managing director, R Kashyap, told Financial Chronicle.

The ministry release said Nabard would float 10-year zero-coupon Bhavishya Nirman Bonds with a maturity value of Rs 20,000 before March 31. These deep- discount bonds will attract long-term capital gains tax. Even with a 50 per cent discount, Nabard will be able to mop up Rs 9,500 crore from the issue of 9.52 million bonds.

Kashyap said his organisation would not be able to mop up the entire sanctioned amount at one go.

“We cannot raise more than Rs 1,500 crore before March 31. Therefore, we will ask the finance ministry to roll over the issue. The remaining money will be raised only in the next financial year,” he said.

The first tranche will be for private placement with high net worth individuals. The issue will have a lock in of seven to 10 years, he said, though the finance ministry release mentioned five years.

“We are yet to finalise the coupon rate. A tax- free bond normally carries an interest of 5.8 per cent. Since investors will certainly like to have some premium, we are considering a coupon rate of 6.2 or 6.3 per cent,” he said.

The finance ministry decisions mark the comeback of tax-free bonds and deep-discount bonds. Power Finance Corporation and India Infrastructure Finance Company (IIFCL) have sought capital gains tax exemption for their debt issues.

Their issues, for a total of Rs 35,000 crore, are slated to hit the market in the next financial year. The finance ministry is yet to take a decision on this.

The last bond issues granted tax benefits were those of Rural Electrification Corporation and National Highways Authority of India in November 2007.

Investors in earlier bond issues of National Housing Bank (NHB) and Nabard were exempt from capital gains tax. Nabard’s next round of debt, in the shape of deep-discount bonds, will not enjoy the exemption.

“Normally a zero- coupon bond, or deep- discount bond, gives the investor a chance to gain higher returns as it is issued at a discounted rate and has minimal chance of being called before maturity. These bonds were very popular earlier but they disappeared,” said Krishnan Sitaraman, director, Crisil Fund Services.

“Investors will have the indexation benefit as the appreciation on his capital will attract a lower tax rate in deep- discount bonds,” added Dhirendra Kumar, chief executive officer of Value Research.